2022 Was Arguably The Worst Year for Retirement Accounts Since 1931 (2024)

(This is an excerpt from a newsletter we published this week to our Carbon Collective members. We're sharing this in the spirit of general financial education and not to offer any investment advice).

2022 was a historically bad year for portfolios, particularly retirement style portfolios that balance stocks with bonds.

Let's start with stocks.The S&P 500 fell-18.01%in 2022.

That's painful, but it's not anomalous. From 1928 - 2022, the S&P 500 has ended negative 26 out of the 94 years. That's ~27.6% of the time. 2022 ranks #7 in worst-performing years.

But 2022 was different. Because of bonds.

In 2022, US Treasury Bonds fell by-17.84%in value. And corporate bonds fell by-14.49%.

This is not how bonds usually behave in a stock market downturn. In fact, of the 26 years the S&P 500 ended negative, only 5 of them also had a negative treasury bond performance with 10 of them having a negative corporate bond performance.

We heard from a number of you that 2022 was a particularly painful year. And you're not wrong. The historical data suggests as much. So we wanted to take the opportunity to walk through:

• The extent to which 2022 was anomalous from a historical perspective.
• Why it happened
• What are the tea leaves looking like for 2023?

2022: The worst cumulative performance year since 1931

(To generate this data, I copied thishistorical datasetfrom the NYU Stern School of Business. You can make a copy of thespreadsheet here)

I built the graph above by simply adding together the annual performance of the S&P 500, the US Treasury Index, and the Corporate Bond Index.

Full disclosure, this should not be confused with actual performance, but it helps show how anomalous 2022 was.

The cumulative performance for these three indices in 2022 was-50.33%. The only worse year of cumulative performance was 1931, the single highest year of financial fear since we've been keeping records of US markets. 1931 came in at a cumulative score of-62.08%. If you're curious 3rd place was 1937 at-38.38%.

2022 was anomalous because of that cumulative bond performance.

Here's the top 5 worst cumulative years of performance from combining US treasury and corporate bonds:

• 2022 –Cumulative Bonds: -32.32% – S&P 500: -18.01%
• 1931 –Cumulative Bonds: -18.24% – S&P 500: -43.84% (ouch)
• 2013 –Cumulative Bonds: -10.16% – S&P 500: +32.15%
• 1994 –Cumulative Bonds: -9.36% – S&P 500: +1.33%
• 1999 –Cumulative Bonds: -7.41% – S&P 500: +20.89%

As you can see, 2022 was the worst cumulative performance by far. 1931 comes in 2nd and had a much worse stock performance.

But 2013, 1994, and 1999? They all had positive S&P 500 performances.

This speaks to just how weird 2022 was. It wasn't a great depression like 1931 where the economic sky was falling. But it had similarly a-historic performance.

And it ran counter to the relationship that investors, particularly retirement investors have relied upon: that when stocks fall, bonds generally don't.

This what helped shield some soon to be retirees in 2008. The S&P 500 fell -36.65% in 2008. Ouch. The corporate bond market fell, but the treasuries rose significantly.

• 2022 –Cumulative Bonds: -32.32% – S&P 500: -18.01%
• 2008 –Cumulative Bonds: 15.03% – S&P 500: -36.55%

The historic "glidepath" to retirement has been to be heavy in stocks when you are young and retirement is far away. You can afford to have years like 2008 because you're not going to be using the investment any time soon.

But as you get closer to that retirement date, you shift into bonds to "protect" the gains you made from your stocks. Historically, bonds have a lower risk/reward relationship, so as you get closer to actually using the money, you want your portfolio in something that is less likely to lose a third of its value in a year (like the S&P 500 did in 2008).

This relationship did not hold in 2022. That made it an especially painful year for those who are retired or close to it. And what surprised many of you when you looked at your end of year statement was that unlike 2008, when the economy was clearly entering a sharp downturn, 2022 didn't feel that way. Companies were still hiring and economy was still growing.

So 2022 had a 2008 style performance but without the 2008 context

So what happened? Why?

2022: Why was it so anomalous?

Up until this point, we've covered what led to the stock market declines pretty heavily.

1. Inflation emerged. The excess cash in the economy combined with the supply chain crunch from global lockdowns led to too much cash chasing too few goods.
2. Russia's invasion made it worse. In particular it made oil more expensive.
3. Companies could raise prices without getting punished. When everyone is talking about inflation, it gave corporations somewhat of a carte blanche to raise prices.
4. So the federal reserve did the only thing it can do: raise interest rates. And they raised rates from near zero to now around 5%.

All of these priced in the fear of recession generally into stock markets and hit certain sectors that have been dependent on cheap capital and low interest rates, like tech stocks, particularly hard.

But the rapid escalation in interest rates also did a number on bond markets.

Simply put, new bonds issued at higher interest rates were suddenly MUCH more valuable than old bonds investors were sitting on.

Would you rather own a $10,000 bonds that pays you 2% ($200) per year or one that will pay you 5% ($500) per year?

A bunch of investors owned bonds more similar to the former. So almost overnight, those bonds became significantly less valuable.

This is why a bank like SVB suddenly found itself sitting on a bunch of bonds that just became way less valuable.

And it's why we saw both the US treasury and corporate bond market fall so much. Because the Fed raised rates so quickly, the newly purchased more valuable bonds could not offset the losses from the existing bonds in broad indices fast enough. So they fell across the board.

And it wasn't just the rapid escalation of interest rates, it was that they climbed so quickly from such a low interest rate. They effectively doubled in a single year.

So it's not just that interest rates went up. It's that rates almost tripled in that timeframe.

Looking Ahead: 2023 and Beyond

So given all of this, what should you do?

Even in such an anomalous year, the basic logic of longterm investing holds.

• Don't sell when the market is down (unless you have to)
• Buy more if you can (everything is on sale)
• Make sure your emergency fund (6-12 months of expenses) is in a good, safe place and enjoying these higher interest rates!

But what can we expect 2023 to look like? Is 2022 a sign of the end of the historic relationship between stocks and bonds?

Probably not.

2022 was a bear market. The anomalous part is it happened in both stock and bond markets at the same time.

It seems like both markets have more or less "priced in" the new normal of higher interest rates.

If more of a recession comes, the Fed will pull back on interest rate hikes and could start lowering them. Lower rates will make today's bonds more valuable.

If more of a recession doesn't come, we could see the stock market go up as investors have been pricing in a near term slow down.

Barring another global crisis like Covid, we probably are going to be living in a world with higher interest rates. That nadir of 10 year treasury rates at the beginning of the lockdowns could very well be a turning point where we see interest rates stay elevated and generally trend upwards as fears of inflation remain.

This will be a new economic world to be adjusting to, but the shock of the revelation is probably behind us. Probably.

The only thing that is guaranteed in investing is that there are no guarantees of future returns. Q2 should be an interesting one!

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